Anyone else notice these have tightened up significantly in the last few days? Appears there are multiple people quoting now, although not for a ton of size.
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CBOE Variance Futures
- Thread starter sle
- Start date
Quote from trickyname:
Anyone else notice these have tightened up significantly in the last few days? Appears there are multiple people quoting now, although not for a ton of size.
i wonder if the margin is considerably better comparatively to vix futures.. now that vix futures are 5x what they were
(a) CBOE has been trying to rescue these things, though I have zero expectation that it will work. They had a rep come by and be all lyrical how a lot of people do not give a shit want to quote these. This is take 4 at least, and all previous ones have failed).Quote from trickyname:
Anyone else notice these have tightened up significantly in the last few days? Appears there are multiple people quoting now, although not for a ton of size.
(b) if you think VIX futures margin is high, these ones are even higher. One of the reasons HFs apparently don't even consider these things is that the margin is about 2-3 times what they normally post OTC
(c) the main problem, in my view, is that instead of shooting for the retail/small-player market, they are trying to take over the market that's already well established (OTC variance). Instead, they should be trying to make variance accesible to retail and semi-retail by making it a bit more intuitive to trade.
Quote from cdcaveman:
i wonder if the margin is considerably better comparatively to vix futures.. now that vix futures are 5x what they were
Margins are 2-3x what they would be for a VIX future, but that's understandable given the much higher convexity in a variance swap as opposed to the more linear VIX future.
I'm not sure that somehow simplifying it and making it more accessible to the average retail investor is necessarily a good thing, though. A certain level of sophistication is required to understand the risks involved, and the people most likely to understand that risk are at the more advanced end of the retail spectrum or on the institutional side.
Dodd-Frank will eventually force these to be centrally cleared, if not traded as well, but it remains to be seen if this is the most popular way to go about it.
Quote from trickyname:
Margins are 2-3x what they would be for a VIX future, but that's understandable given the much higher convexity in a variance swap as opposed to the more linear VIX future.
I'm not sure that somehow simplifying it and making it more accessible to the average retail investor is necessarily a good thing, though. A certain level of sophistication is required to understand the risks involved, and the people most likely to understand that risk are at the more advanced end of the retail spectrum or on the institutional side.
Dodd-Frank will eventually force these to be centrally cleared, if not traded as well, but it remains to be seen if this is the most popular way to go about it.
i have to be able to visualize something.. VA seems like a container marked to be filled by a snapshot of the vix at a particular time, then the container sort of starts getting filled up by the day to day variance, the futures are the market price of the variance remaining after each day. thats my best guess. I got mixed up in the math before, and couldn't quite put it into a visualization.. As expiration approaches one day of large variance has a larger affect on price, more convex in nature. anyone can correct me if i'm wrong
I was pretty excited when the variance futures first came out, but my experience has been that it's something liquid in OTC is very hard to move it to the exchange. As for central clearing, IR swaps and CDS are already cleared through LCH and if I had to guess, variance will go the same way.Quote from trickyname:
Dodd-Frank will eventually force these to be centrally cleared, if not traded as well, but it remains to be seen if this is the most popular way to go about it.
Btw, one important fix that CBOE has apparently made is the fact that a newly-traded futures contract does not accrue variance before the close (so just like the OTC format).
Quote from cdcaveman:
i have to be able to visualize something.. VA seems like a container marked to be filled by a snapshot of the vix at a particular time, then the container sort of starts getting filled up by the day to day variance, the futures are the market price of the variance remaining after each day. thats my best guess. I got mixed up in the math before, and couldn't quite put it into a visualization.. As expiration approaches one day of large variance has a larger affect on price, more convex in nature. anyone can correct me if i'm wrong
My comment wasn't directed at you in particular, was just in general.
Your container metaphor is a good start, but it's not a snapshot of implied vol that it gets filled with, but rather the actual close-close move in the index. It's possible for the market to move a decent amount and not have the VIX move at all. Also, each day is equally weighted, so a big move on the first day and the last day of the swap have the same effect. One day of large variance close to expiration will only have an outsized effect if you don't trade the swap until a few days before settlement.
Quote from sle:
I was pretty excited when the variance futures first came out, but my experience has been that it's something liquid in OTC is very hard to move it to the exchange. As for central clearing, IR swaps and CDS are already cleared through LCH and if I had to guess, variance will go the same way.
Btw, one important fix that CBOE has apparently made is the fact that a newly-traded futures contract does not accrue variance before the close (so just like the OTC format).
I'm sure the dozen or so dealers that are active OTC will resist the move since they want to continue internalizing their customer flow, but if end users start bypassing them in favor of more transparent markets they may be forced to play in the space.
As you mentioned previously, though, the margin makes it a tough pill to swallow. Offering cross-margining against other listed options and futures might help to mitigate some of it.
Oh, so here is my rant. So far, I see 0.75-0.5 wide 1-2k vega notional per side. My dog can make a market like that, especially considering that you can replicate it in vix futures. The only way this could work is if the primary MM (DRW in case of variance futures) is willing to show very tight markets in size so people feel that liqiudity is there and get involved. This might bring in people that have no OTC access, be it retail, small ISDA-less funds or CTAs.Quote from trickyname:
I'm sure the dozen or so dealers that are active OTC will resist the move since they want to continue internalizing their customer flow, but if end users start bypassing them in favor of more transparent markets they may be forced to play in the space.
All I am saying is that I'd not hold my breath for the listed product to take off, unfortunately.
PS. I think variance swaps are unique in that most people are not really worried about transparency or liquidity. Approximate levels for variance swaps can be easily imputed from the strips (or from vix futures) and the only thing you need to worry about is the basis. Liquidity-wise it's about as easy (hard) to get done on a 1m variance as in a 1000 vix futures.
Quote from sle:
I was pretty excited when the variance futures first came out, but my experience has been that it's something liquid in OTC is very hard to move it to the exchange. As for central clearing, IR swaps and CDS are already cleared through LCH and if I had to guess, variance will go the same way.
Btw, one important fix that CBOE has apparently made is the fact that a newly-traded futures contract does not accrue variance before the close (so just like the OTC format).
eurostoxx div futures have done pretty well.